Amartya Sen’s impossibility of a Paretian liberal underscores the trade-off between two widely applied social principles—liberalism (i.e., each individual may exercise the freedom to make certain decisions concerning his or her private domain) and Pareto principle (or economic efficiency): “If someone does have certain liberal values, then he [or she] may have to eschew his [or her] adherence to Pareto optimality” (Sen, Journal of Political Economy 78:152–157, 1970a:157). This chapter extends the Paretian liberal paradox to the firm, understood as a socio-economic institution with a hierarchical nature aimed at sparing transaction costs (Coase, Economica 4:386–405, 1937). The chapter shows that, even if the firm’s hierarchical nature may improve the efficiency, it may conflict with liberal values.

Keywords: Paretian liberal paradox; Amartya Sen; A firm’s hierarchy; Transaction costs; Code of business conduct.

JEL Codes: D23, D63, D71, I30, J01.